Saturday, February 04, 2017
4:44:15 PM EDT

Forget Last Week

by
Jim Brown

Just pretend last week never happened because the markets closed almost exactly the same place as the prior Friday.

Weekly Statistics

Friday Statistics

Everything you need to know about the market can be seen in the first graphic above. Note the changes for the week for each index in the weekly graphic above. If that were your only picture into the market, it would appear nothing had changed. Of course, if you were paying attention all week you would have seen the -27 point decline in the S&P at Tuesday's low and the -307 point decline in the Dow. Those are some big numbers but they were completely erased by the short squeeze on Friday.

Despite the rebound, the indexes are still at lower highs with the exception of the Nasdaq, which closed at a new high. The Dow gapped up to 20,071 on Friday and then traded sideways the rest of the day to close at 20,071. Yes, that overhead resistance from the prior week is still intact.

Friday's short squeeze was powered by the resumption of the Trump rally and strong economic numbers. The financials exploded higher after comments from the Trump team they were about to reverse some of the regulations in the massive Dodd-Frank bill that is crippling the banking system. The strongly hated Fiduciary Rule in Dodd-Frank that limits investments in retirement accounts was first on the chopping block. The rule required financial professionals to advise investors toward the lowest commission, least risk products and away from products that had higher commissions and potentially higher returns. It sounds like a good idea in theory but it was crushing the business and causing significant rotation of client funds in order to comply with the rules. The industry said it actually added costs to low dollar accounts and would ultimately make small accounts unprofitable.

The four financial stocks in the Dow were the biggest gainers and those four stocks alone added 125 points to the Dow.

The economic news came from the Nonfarm Payrolls for January. The headline number of 227,000 new jobs was well above expectations for 167,500 but not quite as strong as the ADP Employment report from Wednesday. The ADP number was a blowout at 246,000 new jobs compared to estimates for 165,000 and the 153,000 reported in December.

Big gains came from construction with 36,000 new jobs and leisure/hospitality adding 34,000. Retail saw a gain of 46,000, which is surprising given the onslaught of bad news out of the sector over the last month. Even more surprising the retail number from December was revised higher from 6,000 to 34,000. Analysts theorize the January number was stronger because the normal holiday hiring was weak. That meant fewer layoffs in January, which caused the normal seasonal adjustments to show a higher total.

Manufacturing and Mining (energy) added 9,000 jobs. Financials added an unusual 32,000 jobs in January when some of the big banks were actually cutting back on costs.

The only negative news in the jobs report was a minor +0.1% gain in average hourly earnings. Since the higher minimum wage took effect in multiple states in January, there was an expectation for wages to be a little bit stronger.

The labor force saw a gain of 76,000 workers and the participation rate rose 2 tenths to 62.9%. The unemployment rate rose one tenth to 4.8% because of the rise in the workforce.

January is the annual benchmark revisions to the prior year data. This year there were very small revisions and the first three months of the year were so small I did not include them in the table below.

The top line is the most current numbers plus the revised numbers from the past months. The second line was the prior revision, third line the prior and fourth line the original release. The payroll numbers are normally revised in each of the two months following the first release. Then they are revised again in the benchmark revisions in January. The benchmark revision for all of 2016 accounted for a net of only 88,000 additional jobs. That unbelievably low compared to prior benchmark revisions in years past. The Nov/Dec revisions are the normal month-to-month changes and they accounted for a decline of 41,000 jobs from the previously reported numbers.

Market analysts were mixed on whether the strong jobs would encourage the Fed to move forward its rate hike plans and begin in March but most felt the Fed will pass. Evercore said there "was little need for the Fed to pull forward the next rate hike into March." BNY said analysts would be moving their expectations from March to June. Goldman Sachs said it reduced the chance of a March hike from 35% to 15% and now expects 3 hikes in June, September and December. Societe Generale said there was now no pressure on the Fed to accelerate rate hikes into March. Bank of America said the chance of a hike in March is now fairly low and they only expect one hike in September, with the potential for a second. However, Prestige Economics said "A March rate hike is now a lock" after the strong jobs support. ING said the jobs confirmed their expectations for a March hike.

The CME FedWatch tool is now showing only an 8.9% chance of a hike in March, down from 24% a week ago.

The Atlanta Fed GDPNow for Q1 was just released and they are projecting a whopping 3.4% GDP growth compared to the 2.2% average growth projection by 20 top forecasters and their own 2.3% forecast on January 30th. The sharp revision was due to the strong ISM Manufacturing report and Construction Spending report.

The chart looks strange because they do not start adding their own forecasts until the prior quarter GDP is released by the Bureau of Economic Analysis. That happened on January 27th with a 1.9% growth rate for Q4.

The GDPNow will undergo dozens of revisions over the next three months and most analysts seriously doubt the 3.4% forecast.

The ISM Nonmanufacturing Index for January declined slightly from December's previously reported 57.2 to 56.5 but still well into expansion territory. However, December was revised down to 56.6 so it was basically unchanged. New orders rose from 54.2 to 59.9 but backorders fell from 50.0 to 47.5. The employment component improved slightly from 49.7 to 52.7. The services sector has been doing ok with no contraction readings since December 2009. The nonmanufacturing segment of the economy accounts for 88% of nominal GDP.

December factory orders for manufactured goods rose +1.3% and considerably better than the -2.3% decline the prior month. Analysts were expecting a 1.0% rise. Factory shipments rose 2.2% compared to 0.3% in November. The headline number was impacted by a -33.5% decline in defense orders. This was a good report but it was ignored.

The calendar for next week is devoid of any market moving reports. There are only four Fed speakers. This will be a quiet week for economic events.

Earnings are also starting to slow down but there are two Dow components, Disney and Coca Cola. On the S&P, 84 companies will report. Tesla is probably going to be the most watched report since they now have a full quarter of SolarCity results. They officially changed their name last week from Tesla Motors to Tesla Inc.

YUM Brands and YUM China report so it will be interesting to compare the results again. Twitter will report on Thursday but they are only an afterthought these days. If it were not for Trump keeping the activity alive with the tweets and re-tweets of his comments, the news volume would be a lot lower. Analysts believe there is a known buyer in the wings that is waiting for Twitter to reduce expenses significantly and post multiple quarters of results from the Twitter Live product, before they surface with a new public offer. Unfortunately, analysts believe it could be in the $15 range.

More than 55% of S&P companies have reported earnings and 65% have beaten on earnings while 52% have beaten on revenue. The current blended earnings growth rate for Q4 is 4.6% and well above the 3.1% estimate on December 31st. The revenue growth rate is +4.6% and that is lower than the +4.9% forecast at the beginning of the quarter. Of those reported, 44 companies have issued negative guidance and 21 issued positive guidance. Since the Q4 earnings cycle began, analysts have only cut Q1 estimates by -1.5% and that is less than the historical -2.5% average at this time. This suggests analysts are positive about the guidance they have been seeing. Upgrades to estimates for the energy and financial sectors are responsible for the better than average revisions.

The percentage of companies beating on earnings at 65% is lower than the 71% average. The percentage of companies beating on revenue at 52% is only lower than the 53% average. The average earning surprise of 2.5% is below the 4.4% average. There are fewer companies beating by a smaller amount but the difference is still minimal at this point.

There were very few major companies reporting earnings on Friday. Clorox (CLX) reported earnings of $1.25 compared to estimates for $1.22. Revenue was $1.41 billion and that matched analyst estimates. They guided for the full year for earnings of $5.23 to $5.38 per share, down from the prior forecast for $5.23 to $5.45. Volume rose 8% and international sales offset domestic declines in the cleaning and lifestyle segments. Shares rallied $5 on the news.

AutoNation (AN) reported earnings of 95 cents that missed estimates for 98 cents. Revenue of $5.48 billion also missed estimates for $5.62 billion. The company has now missed revenue estimates for seven consecutive quarters and only met earnings targets in one of those quarters. Competitive pressure cut more than $100 from the profit of every car sold and the company said those pressures will remain in 2017.

Hershey (HSY) reported adjusted earnings of $1.17 that beat estimates for $1.08. Revenue of $1.97 billion missed estimates for $1.99 billion. They guided for 2017 for earnings of $4.72 to $4.81 and analysts were expecting $4.64. The company said a -16.6% drop in sales in China weighed on the results. Hershey said they have not yet discovered the nuances of chocolate flavors desired by Chinese consumers.

The company announced a dividend of 61.8 cents for the common stock and 56.2 cents on the Class B stock. The dividends are payable March 15th to holders on February 24th. This is the 349th consecutive regular dividend on the common stock and 130th on the Class B stock.

There were a lot of extreme reactions to earnings posted after the bell on Thursday. These were some of the major moves.

GoPro (GPRO) reported earnings of 29 cents that beat estimates for 21 cents. However, revenue of $540.6 million missed estimates for $576 million. The company guided for revenue of $190 to $210 million for Q1 and analysts were expecting $267.6 million. Shares fell 13% on the news.

Amazon (AMZN) reported earnings of $1.54 that beat estimates for $1.40. Revenue of $43.71 billion missed estimates for $44.87 billion. Revenue rose 22% but still missed estimates suggesting the estimates were too high. The company guided for Q1 revenue of $33.25 to $35.75 billion and analysts were expecting $35.83 billion. Amazon bragged that their Prime members could now choose from over 50 million items with free two-day shipping. The company is spending more than expected in developing its air cargo project with 40 Boeing 767 cargo jets. They plan to spend $1.5 billion to build a new cargo center at the Cincinnati/Northern Kentucky Airport in Hebron Kentucky. The center will employ more than 2,000 workers. That is just part of the 100,000 workers Amazon plans to hire over the next 18 months. Amazon currently has more than 4,000 trucks and adding more every day. Shares declined $30 on the earnings news.

Amgen (AMGN) reported earnings of $2.89 that beat estimates for $2.79. Revenue rose 8% to $6.0 billion that beat estimates for $5.74 billion. For 2017, they guided for earnings of $11.80 to $12.60 and analysts were expecting $12.46. They guided for full year revenue of $22.3 to $23.1 billion compared to estimates for $23.3 billion. They announced positive data on cholesterol drug Repatha that has shown to reduce heart attacks and strokes for people with high LDL or "bad" cholesterol. Recent sales were only $30 million because 75% of the prescriptions were rejected by insurance companies while they awaited further proof of results. This should boost sales in 2017. The drug is injectable twice a month and costs $1,148 a month at discount pharmacies for just two doses. Shares rallied $8.

FireEye (FEYE) reported an adjusted loss of 3 cents that beat estimates for -16 cents. Revenue of $184.7 million missed estimates for $191.1 million. They guided for the current quarter for revenue of $160-$166 million and analysts were expecting $177.5 million. Shares crashed 16% on the news.

Chipotle Mexican Grill (CMG) reported earnings of 55 cents that missed estimates by 2 cents. Revenue of $1.03 billion missed estimates for $1.04 billion.
Same store sales declined -4.8% for the quarter but rose 25% for January. The chain is trying to bring customers back in with constant offers of free food but winning them back after multiple food borne problems has been difficult. Shares fell $19.

Tableau Software (DATA) reported earnings of 26 cents on revenue of $250.7 million that beat estimates for 13 cents and $230.3 million. License revenue rose 14% to $152.2 million. They added more than 4,000 customer accounts and closed 589 transactions greater than $100,000. That was a 42% increase from the year ago period. Shares spiked 15%.

Macy's (M) is reportedly in acquisition talks with Hudson Bay Co (HBC.TO). Discussions are in the early stages and they could reach a deal that does not include an outright purchase of the struggling Macy's chain. Macy's has been selling off real estate in small quantities to appease activist investor Starboard Value LP, which has been pressing the company to consider other strategic alternatives. Hudson Bay owns the Saks Fifth Avenue and Lord & Taylor brands as well. Macy's currently has about 730 stores but only half are in the best malls. They announced plans to cut 6,200 jobs in January and close 100 stores. Macy's $10 billion market cap is about 7 times larger than Hudson Bay. Shares spiked 6% on the news.

According to a Bloomberg survey OPEC produced 32.3 million Bpd in January after they cut 840,000 bpd from their output. The 10 OPEC countries that agreed to cut production were only 83% successful. Production increased in Iran, Libya and Nigeria in accordance to the agreement. Combined they produced an extra 270,000 bpd. Libya increased production to 690,000 bpd and the highest level in more than two years. They are trying to get back to the 1.6 mbpd before the civil war began. That means OPEC is still 550,000 bpd above their production cut target. Bloomberg produced this graphic showing who met their targets and who did not. Those that exceeded the target cut an extra 270,000 bpd but the rest of the pack failed to keep up.

If you remove the three countries that cut more than required, the remaining countries are only about 65% in compliance and that is historically about where OPEC has seen compliance peak in the past.

Russia said it cut production by 117,000 bpd and would try to reduce supply by the agreed 300,000 bpd by the end of June when the agreement expires. I am not holding my breath.

Oil prices have been trading in a narrow $3.50 range for the last month while everyone waited to see if OPEC was going to pull off a miracle. With roughly 65% compliance and three other countries adding 270,000 bpd, the odds of reaching full compliance are nearly zero.

The U.S. active rig count surged another 17 rigs last week to a 16-month high of 729. All the land rigs added were oil rigs. Seventy rigs have been reactivated over just the last three weeks. This is going to result in a sudden surge of oil about six months from now and the same time the OPEC production cuts expire.

Institutional investors are holding record net longs in the WTI futures contracts. This may not end well.

Markets

You have heard of the Midas touch that turned everything to gold. On Friday, the markets were touched by Goldman and everything turned green. Goldman's $10.50 rally added more than 71 points to the Dow and that opening spike kicked the financial sector and the short covering into high gear.

Goldman traded below initial support at $230 on Tuesday and Thursday but came roaring back on the news Dodd-Frank and the fiduciary rule were going to be tamed.

Add in Visa, JP Morgan and American Express and that accounted for nearly 70% of the Dow's gain. The opening spike forced ETF shorts to cover and we were off to the races.

However, the Dow never reached the finish line. The index came to a dead stop at 20,070 with only a slight flirtation with 20,080 at the close. I am going to reprint the chart I showed at the beginning of this commentary because it shows the market movement so perfectly. It was a short squeeze with a dead stop at resistance. There is no other way to describe it. Everyone continues to hope that we will get a decent pullback as a buying opportunity. The four-day market dip in the chart below is about all we are going to get given the current state of market sentiment.

We could move higher next week but it will need to be powered by some new stimulus and I don't know what that will be. We know from the prior week that resistance is strong and with only two Dow components reporting late in the week, there could be a lack of motivation. We are also approaching that point in February where the post earnings depression phase normally appears. All the big names have reported and there is a lack of targets for traders to buy ahead of the remaining earnings. Those stocks already reported, suffer from investor flight as traders take profits and move on to some other strategy.

I would like to predict the Dow will blast through that resistance but without some new headline, it could be really tough. We have not had a market moving presidential tweet in several days so there is always that possibility over the weekend. Who know which world leader will cause the next tweet storm? I am hoping the president will realize that tweets can have negative consequences and tone down the rhetoric somewhat. Remember the immigration ban from last week that caused the market to decline on Monday.

On the S&P the 2,299 level was strong resistance for three days last week. I wrote that the 2,300 level on the S&P was the new Dow 20,000 because that is where the all the attention will now be focused. The S&P gapped open to 2,298 and closed at 2,297 after being unable to gain any additional ground the rest of the day.

We did form two new support levels last week at 2,275 and 2,268. If we do take another trip down memory lane next week, those levels should provide at least a brief pause.

I am shocked that Amazon's $31 decline did not hold the Nasdaq back. The index did post a rather sedate gain of 30 points but that was enough to close it at 5,666.77 and a new record high. The prior high was 5,660. The Nasdaq has been the market leader for weeks and it was helped by the transportation, biotech and financials on Friday. Yes, there are financials in the Nasdaq that make up 9% of the index. It is thought of as a technology index and that is 42% of the weighting. Support is now 5,625 and 5,580.

Biotech stocks had a good week with the Biotech Index ($BTK) gaining 3.7%. It was the only index to rise triple digits. The week started with the president meeting with pharma CEOs at the White House and promising to cut regulations and taxes and get drugs approved faster. That was the start of a good week and major support for the Nasdaq.

The Russell 2000 was also buoyed by the short squeeze in the financials and the index posted a 1.5% gain to close just over prior resistance at 1,375. The index has not been able to retest the 1,388 level in four weeks. The Russell has been the weakest index and we need it to take the lead again.

It seems like every weekend recently we have been at a critical point in the markets. This weekend is no different. The Dow and S&P are at resistance highs. The Nasdaq did close at a new high by 6 points but that might as well be a resistance high. The Russell is lagging and the Dow Transports were imploding until the Friday short squeeze.

Last Friday the S&P closed at 2,294 and this Friday at 2,297. The market tried hard to sell off throughout the week and was unable to break support. It looks like we are going to test resistance next week. A breakout at these levels could cause significant short covering because there is very little confidence in a continued rally. I know that sounds strange since we have been unable to produce a meaningful decline but a lot of investors are still not convinced. I get emails every week from readers still short and asking why the market is not going down. I tell them because there are more people looking for a dip to buy than a spike to sell but they are convinced we are going lower. Eventually they will get their correction but it may be from a lot higher level.

Random Thoughts

The markets were down early in the week and this survey closes on Wednesday. After weeks of sentiment imbalances, all three positions have moved to where they are almost equal. That is a clear sign there is no conviction in either direction. The bears probably have the edge this week because the market was down on Monday and Tuesday.

Last week results

Sucking up to Trump. I had to read this more than once it is so unbelievable. Japan is preparing a package to submit to President Trump next week, to create 700,000 U.S. jobs. The concept is that Japan will use its foreign exchange reserves to invest in infrastructure projects in the U.S. to avoid being labeled a currency manipulator. Prime Minister Shinzo Abe will meet with the president on February 10th in Washington to present the package. This is truly stranger than fiction. Source

A little over a month ago, Barron's published an article headlined Get Ready for Dow 20,000. Since the Dow was about 19,900 at the time it was not that big of a deal but the cover got the normal ridicule. They say you can tell when the market has topped when newspapers and magazines begin to run giant headlines about the new highs.

The market did not crash and did close over 20,000. For an encore, Barron's has an article this weekend on "Next Stop Dow 30,000." No, they are not predicting 30,000 over the next several weeks or even in 2017. They are predicting this by 2025. That is eight years from now and an eternity in market time.

The key point here is that while that sounds crazy, that is only a 5.5% annual average gain. I think they could be right. There will be some years with smaller gains but there should also be some years with larger gains if we get the expected tax cuts and don't end up with a trade war or a real war.

The current pro business administration could actually produce several strong years in the market if they stick to the programs they have outlined and not get sidelined in the minutia. They should take President Obama's favorite saying to heart. "Don't do stupid stuff." If they stuck to that motto, we might even get there before 2025.